The Definition of Insanity

Is government housing policy:

Recent steps by federal regulators make it clear: low down-payment loans, a feature of the housing market’s boom, are coming back.

On Monday, Federal Housing Finance Agency Director Mel Watt announced that mortgage-finance companies Fannie Mae and Freddie Mac would start backing loans with down payments as low as 3%.

And on Tuesday, three federal agencies approved a loosened set of mortgage-lending rules, removing a requirement for a 20% down payment for a class of high-quality loan known as a “qualified residential mortgage.”

Loans with little to no down payment were a common feature of the lax lending practices that were prevalent during the housing market’s bubble years.

Yes, my friends. Not content with easy mortgages wrecking the economy and destroying what little wealth the poor and middle class had accumulated, our government is back for more.

Why on Earth would they want to do this? McArdle:

Because, I think, most of us still haven’t managed to shed the idea that buying a house is a good way to get some unearned bonus wealth. Too many people managed to do just that for too many years. We think of 2008 as an aberration, rather than reversion to the mean. And that’s a costly mental error.

The long, steep increase in American home prices from 1946 to 2008 was driven by a whole lot of trends that are hard to repeat: the invention of the 30-year, fixed-rate, self-amortizing mortgage, which allowed people to pay more for a house by lowering the monthly payments. The securitization revolution, which lowered mortgage risk by bundling the loans into large, diversified portfolios, thereby lowering rates. Rising inflation, which pushed up the price of houses. Falling inflation, which lowered interest rates and monthly payments still further and allowed people to pay even more for those houses. The credit-scoring revolution, which allowed banks to offer loans to more people, increasing demand for the existing housing stock. And in dense coastal areas, you also had the rise of NIMBY zoning laws, which made housing scarcer and therefore more expensive.

The problem is, these things have already happened. Most of them cannot happen again — interest rates can’t really go much lower.

Out government is consumed with the idea that home ownership is the path to wealth for the poor and lower middle class. But nothing could be further from the truth, as the last decade proved. The housing bubble hurt the wealthy … a bit. But it completely burned what little wealth existed in the lower quintiles of our society.

The reason is that houses aren’t a great investment. They’re a good investment … if you have a stable income and employment situation and can manage money well. They’re a stable investment … if you have some equity. But people are besotted with idea of real estate as the gate to wealth.

Low down-payment loans are especially dangerous for people trying to climb the economic ladder. They can allow people to make a quicker entry into housing. The danger, however, is that a house with low equity is a highly leveraged investment. If you make a down payment of 3% and housing prices fall 3%, 100% of your equity goes up in smoke. The reason so many people ended up in underwater mortgages with negative wealth was because they had such a thin margin of equity.

But … they never learn. This will happen again and they still won’t learn. The people running our government and their cheerleaders in places like the Center for American Regress will continue to believe that there is a alchemical formula for creating middle-class wealth out of thin air. I guess you have to believe in something when you think that businesses don’t create jobs.

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  1. AlexInCT

    But … they never learn. This will happen again and they still won’t learn. The people running our government and their cheerleaders in places like the Center for American Regress will continue to believe that there is a alchemical formula for creating middle-class wealth out of thin air. I guess you have to believe in something when you think that businesses don’t create jobs.

    Hal, while I like your post I do have to wonder if you are coming to this conclusion just now. Glad to see you finally coming to your senses, but the writing was on the wall, back in 2009, when the collectivists, headed by the 2 perps that had the most to do with creating the house of cards that finally collapsed as it would eventually have to -Dodd and Frank – insisted on being the only ones allowed to “fix” the problems they blamed on the lending industry instead of this idiotic leftist pushed agenda to get people that should never own a home to do just that. I pointed out back when that the 2000 page book of “New and improved” – read more of the same stoopid shit – that they produced had not only not addressing the fundamental and underlying problem that caused the collapse – the need for these class/social warriors to use the government hammer to define who wins and who loses – but actually set things up for a repeat of even greater proportions.

    The fundamental reason the left will plunge us back into a dark age (as it destroys all the economic advances their betters produced over the last 2 centuries) is their absolute fixation on having the power to address the unfairness they see in the world and feel has to be done away with, to create the paradise on earth their new religion promises, rest with government. That’s because the role of a divine and benevolent power that all the old time religions they have dismissed as fantasies (to be replaced with their own new fantasy), is now played by government. Those of us that know better understand that the only role government, but especially the government the left wants, will ever be able to play in the left’s new religion, is that of the adversary of that good entity. And the way the collectivist paradises have played out for the last century or so should leave no doubt about that being the case. From Lenin to Hitler to Chavez, they all claim to have meant well.

    The lesson to learn is not just that the world isn’t fair, but that everybody should be weary of the people that promise they can make it so. If you have any common sense you should realize that the best thing to do is to run those shysters out of town before it reaches a point where nothing but a bloody revolution will allow you to pull these blood sucking parasites off your carotid artery.

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  2. Miguelito

    Remember though when the shit hits the fan, it’ll be the fault of those evil bankers. Those “predatory” lenders pull people off the street and force them to sign the paperwork for loans too, it’s never the fault of people knowingly taking on huge mortgages and looking to cash in on rising housing costs.

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  3. ilovecress

    I don’t disagree with you, but what’s the answer? We’re in this system now – where you have to gamble on your first house that you’re buying it at the right time.

    In Auckland right now we have an investor driven housing shortage – 45% of home buys in the last year were by investors. What opportunities (if any) should there be for first time buyers to get a chance to play in the housing market outside of inheritance?

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  4. AlexInCT

    I don’t disagree with you, but what’s the answer? We’re in this system now – where you have to gamble on your first house that you’re buying it at the right time.

    The problem is ilovecress, despite the fact this is probably an unpopular opinion, that most people, especially today, are unfit to own a home. That can be for many reasons, some totally out of their control, but most often simply because they have a proven track record of lacking the financial stability and discipline to own. Giving them the opportunity to own a home is like giving them an opportunity to win a big cash prize playing Russian roulette. Not a nice thing to do, but exactly what the side that likes to pick winners & losers has done.

    What opportunities (if any) should there be for first time buyers to get a chance to play in the housing market outside of inheritance?

    The same one everyone else that has done it the right way did it before: If a home is a priority for you, then prove it. Save the money for the down payment, all while showing a proven employment record and fiscal discipline, then apply for the mortgage to buy it (those investors have to do the same). I did it that way, and even managed to keep my home despite a divorce. I know many people that did it the right way as well as those that did it with the various shortcuts that the people that want to pick winners & losers put in play. It is very seldom that those in the first group lose a home, and thus, it makes the process far more stable and reliable. The other group that got it through short cuts is a different animal. Some lost the home despite trying hard to do the right thing, most, as they had done with everything else in life, walked away when it became a nuisance or they fucked it up (always blaming the bank), and a very few managed to make it work. Considering those odds, these people might have been better off otherwise.

    And if you want to complain about how expensive a home is these days and why that makes the whole saving for the 20% down payment so painful, then also accept the fact we are here because of all the insane zoning regulations that one particular group of assholes in power has put in play in all municipalities. Those of us that make the right choices, especially considering how hard that is these days when the people that make the wrong choices get instant gratification as well as protection from the consequences of their mistakes, are tired of the bullshit. We always end up picking the tab, and when we complain, are accused of being greedy and evil for wanting to keep more of what we have earned, instead of giving more to not just prop up but to expand the very system that encourages the bad behavior and rewards it under the pretense of caring. Fuck that shit.

    Life is not fair, and playing god never ends well….

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  5. Miguelito

    We’re in this system now – where you have to gamble on your first house that you’re buying it at the right time.

    Gamble? If you’re only buying as an investment maybe. If you’re buying a home as your home… well then, you really shouldn’t care too much about its value, unless you’re specifically looking to sell again.

    Granted, you don’t want it to crater completely in value, but if you’re going to continue to live in it, even that’s not a huge deal.

    I always thought it was bullshit when people where so up in arms about being under-water on their home. If it was simply your home to live in, and you’re not planning on moving anytime soon, why do you care?

    I’m actually about to start working on getting a massive remodel (likely a full rebuild) on my home done. Not for the value itself, but because I want it done to my wants and I want to future proof it as much as I can to save costs in the long run. That it’ll likely be worth more is a side effect in my mind.

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